to companies,
firm or other parties listed in the register maintained u/s 301.

3.1.2 Has a list of such loans granted by the company been

scrutinized and a list of loans to parties mentioned in the

aforesaid registers separately obtained? The list should

contain the following:

i.Name
of the party

ii.Relationship
with the company

iii.Amount

iv.Year
end balance

Cross check the list of such loans obtained in (b) above,

with the register maintained by the company under section

301 of the Companies Act, 1956.

3.1.3Has
a list of such loans giving details of terms and

conditions been placed on file? Give No. of parties and

amounts of transactions.

( Maximum balance outstanding at any time during the

year for each party should be considered)

3.2.1Obtain
details of the rate of interest and the terms and

conditions
of such loan. Factors to be considered to evaluate terms:

i.repayment

ii.rate
of interest

iii.restrictive
covenants

iv.financial
standing and ability to borrow / lend

v.nature
of security

vi.availability
of alternative sources of finance

vii.urgency
of borrowing

viii.purpose
of the loan

ix.prevailing
market rate of interest

3.2.2.Obtain
in writing from the management their explanations

as to why
the terms obtained are not prejudicial to the interests of the company in
those instances where better terms could have been obtained.

3.2.3.Check
that loans and advances made on the basis of security have been properly
secured.

3.2.4.If
the terms of the loan given are prima facie prejudicial, has written explanation
been obtained from the company as to why it should not be so considered?

3.3.1 Whether the principal and / or interest are being
regularly

paid? Identify by scrutiny of the schedules of sundry

debtors and loan and advances forming part of balance

sheet and the ledger balances whether any advances have

been given for a figure which is far in excess of the value

of the orders or for a period which is far in excess of the

normal trade practice or any other debit balances could

tantamount to loans or advances in the nature of loans.

3.3.2Test
check the repayments of the principal amounts with the stipulation to ensure
that the party is repaying the principal amounts as stipulated. Extent of
check :

3.3.3Test
check the receipt of interest with the stipulation so as to ensure that
such interest repayments are regular. Extent of check :

3.3.4Identify
the Loans & Advances in the nature of loans where no stipulation has been
made for repayments of the principal amount or for payment of interest.

3.3.5Ensure
that where no repayments of the principal amounts or payments of interest
have been stipulated, the auditor has indicated in the report that he has
not made any specific comments because the terms of repayment and/or interest
have not been stipulated.

3.3.6Obtain
and report information as below for loans given

a)Name
of the party

b)Relationship
with the company

c)Overdue
principal

d)Overdue
interest

e)Year
end balance

3.4.1Obtain
a list of overdue amount of more than1 lakh

per party
– obtain the note regarding steps being taken for recovery of the amounts
and whether they are adequate and reasonable. If not, obtain explanation
from management.

3.4.2Verify
the steps taken by the company as listed above and make your comments where
the steps taken do not look reasonable and ask for company’s response thereto.
Reasonable steps for Recovery include: Amounts involved, issue reminder/s,
sending legal notice, facts and circumstances of each case should be considered
and in absence of legal steps, auditor must satisfy himself that reasonable
steps have been taken.

3.4.3Can
you conclude after considering the above and taking appropriate evidence
on records that reasonable steps have been taken by the company?

3.5 Loans taken by the company

3.5.1Has
the company taken any loans, secured or unsecured

from companies, firms or other parties listed in the register

maintained u/s 301 of the Companies Act. Give No. of

parties and amount involved in transactions. (Maximum

balance outstanding at any time during the year for each

party should be considered )

3.5.2Obtain
a list of such loans containing details of terms and conditions for our
records. Obtain a list of :

1)Name
of the party

2)Relationship
with the company

3)Amount

4)Year
end balance

3.6.1Are
the rate of interest and other terms on which these

loans have been taken prima facie prejudicial to the

interest of the company with regard to comparative terms

for :

a)security
offered

b)rate
of interest

c)terms
of repayment

d)loan
given by the company

e)other
conditions attached

Obtain in writing from the management their explana-

-tions as to why the terms obtained are not pre-judicial

to the interests of the company in those instances where

better terms could have been obtained.

3.7.1Obtain
a list in detail or category wise of loans and

advances
in the nature of loans which have been taken.

3.7.2Scrutinize
the schedule of loans and advances forming part of the balance sheet in
order to ensure the completeness of the list of loans and advances in the
nature of loans given.

3.7.3Identify
by the scrutiny of the schedules of sundry debtors and loans and advances
forming part of balance sheet and the ledger balances whether any advances
have been given for a figure which is far in excess of the value of the
orders or for a period which is far in excess of the normal trade practice
or any other debit balances which could tantamount to loans or advances
in the nature of loans.

3.7.4Test
check the repayments of the principal amounts with the stipulation to ensure
that the party is repaying the principal amounts as stipulated. Extent of
check :

3.7.5Test
check the receipt of interest with the stipulation so as to ensure that
such interest payments are regular. Extent of check :

3.7.6Identify
the loans and advances in the nature of loans where no stipulation has been
made for repayments of the principal amount or for payment of interest.

3.7.7Ensure
that where no repayments of the principal amounts or payments of interest
have been stipulated, the auditor has indicated in the report that he has
not made any specific comments because the terms of repayment and/or
interest have not been stipulated.

3.7.8Obtain
and report information as below for loans given

a)Name
of the party

b)Relationship
with the Company

c)Overdue
principal

d)Overdue
interest

e)Year
end balance

4. Internal
Controls systems

4.1Obtain
a note on the internal control system relating to

purchase
of fixed assets and inventories and for the sale of goods and services.
Also refer checklist on AAS 6

4.2Has
the system as explained been followed during the year?

4.3Obtain
the internal audit reports of the current and previous years and list out
the major weakness of continuing nature that has not been rectified, if
any. Here the weaknesses known to the management continues to persist in
spite of steps taken by the management. Where management has not taken steps
the report should state the same.

4.4As
per auditor’s evaluation of the systems existing during the year, is the
internal control over the purchase of these assets and sale of goods adequate
in relation to the size of the company and nature of its business. Where
any weakness that is capable of resulting in breach of internal controls
is considered to be a major weakness and therefore comes within the ambit
of reporting.

Whether
any major weakness in Internal Control reported in earlier year? If Yes,
whether those weaknesses rectified or are still continuing. Obtain a note
from the management. Whether additional area of major weakness noticed during
the year and reported to the management ?

5Transactions
with related parties as per Register of

Contract
u/s 301

5.1.1.Has
a list of all parties entered in the register under

section 301 been obtained?

5.1.2.Whether
transactions that need to be entered into a register in pursuance of section
301 of the Act have been so entered. Obtain a written representation from
management concerning the completion of the entries in the register u/s
301.

5.1.3.Examine
procedure followed for identifying the parties and the transactions.

5.1.4.Obtain
a list of the firms or companies or other parties where directors are interested.

5.1.5.Obtain
a party-wise statement showing the following details of all transactions
with the parties identified in step above:

a)Purchase
/ Sale contracts reference, date and value

b)Purchase
/ selling rates

c)Value
of purchases / sales made in the year under the contract

Trace transactions
in the books of account.

5.1.6.Cross
check the list obtained in step (d) above, with the disclosure under section
299(3) and the register maintained by the company under section 301(1) of
the Companies Act, 1956 for firms, or companies or other parties in which
directors are interested. Review Form 24AA to ensure compliance with sections
297 and 299.

5.1.7.Review
last year’s working papers to confirm whether data given in step 5.1.2 is
correct.

5.1.8.Enquire
as to the affiliation of directors and key management personnel and officers
with other entities.

5.1.9.Obtain
list of principal shareholders from the share register.

5.1.10.Review
the entity’s income tax returns and other information supplied to regulatory
agencies such as details shown in 3CD in respect of payments to specified
person.

5.1.11.Cross
check all these information with disclosures made on related party transactions
in the notes to accounts.

5.1.12.Review
the joint venture and other relevant agreements entered into by the entity.

5.1.13.Whether
the contracts and arrangements referred to in section 301 have been entered
in the register?

5.2.1Examine
the statement obtained in step 5.1.4 above by

reference to the register of contracts maintained under

section 301(1) of the Companies Act, 1956. Consider for

examination the transaction of all such concerns exceeding

an aggregate value of5,00,000 each.

Obtain list of all purchases of any goods or materials

aggregating during the year to5,00,000 or more in

respect of each party?

Obtain list of all sales of any goods or materials or

services aggregating during the year to5,00,000 or

more in respect of each party?

Ensured that the prices paid/received in above two lists

are reasonable as compared to the prices of similar items

supplied by/to other parties by :

Comparing the rates at which purchase/sales have been

from/to other parties.

Comparing the other terms of purchases/sales such as

terms of credit, delivery period, quality of the product,

reliability of the source of supply; etc?

Quotation Analysis, reasons for not taking the lowest /

highest prices. Identify the contracts or arrangements

where the supply is from only one source or from more

than one source and the prices paid for such transactions

are reasonable as compared to other prices.

Also identify the cases where the supply is from only one

source or more than one source without any price

comparisons with alternative parties.

(Obtain quotation/price list, if possible, as audit evidence)

In the light of above, can we say that the prices paid / recd

for each transaction in respect of each party in a financial

year aggregating to5,00,000 or more are reasonable?

In case of sole suppliers, reasonableness can be ascertained

with reference to list prices of the supplier, other trade terms

etc.

6. Deposits from the public

6.1Has
the company accepted deposits including loans from the

public within the meaning of the provisions of section 58-A

Ensure that the company is not a private limited company

which has restrictions on acceptance of deposits.

6.2If
such deposits have been considered as exempt u/s 58-A,have you placed on
file reasons for the same?

6.3Has
the company complied with the provisions of sections 58A and 58AA and Rules
framed there under and also guidelines issued by RBI?

6.4If
not, has the nature of contraventions been placed on the file and accordingly
disclosed in the report.

6.5Whether
any order passed by the Company Law Board, National Company Law Tribunal
or Reserve Bank of India or any court or any other Tribunal for non-compliance?
If yes, whether the directions are complied with? List out any contravention
and report the same.

7. Internal Audit System

7.1Is
the paid-up share capital and reserves of the company at

the commencement of the financial year in excess of50

Lakhs; or Does the average annual turnover (for
the 3

financial years immediately preceding) of the company

exceed5 crores.

7.2If
yes, does the company have an internal audit system

i.In
the form of outside firm(s) of chartered accountants

ii.In
the form of its own audit department

7.3Has
internal audit programme been reviewed. Was it drawn in consultation with
statutory auditors?

7.4Is
the coverage of internal audit adequate?

7.5Are
the persons carrying out the internal audit adequately qualified for the
job?

7.6To
whom do the internal auditor report?

7.7Have
the internal audit reports been perused and management replies given on
points of defaults and whether they have been duly acted upon?

7.8In
view of what is stated above is the internal audit system of the company
commensurate with its size and the nature of its business.

8. Cost records

8.1Has
maintenance of cost records been prescribed for any of

the activities
of the company

8.2If
so, whether the records have been verified to form a prima facie opinion
thereon.

8.3Having
regard to the above, can it be concluded that prima facie the prescribed
records have been maintained.

8.4Has
cost audit been prescribed in respect of these records and if so, have reports
been perused.

9.1 Statutory dues

9.1.1 Obtain a statement ( for Provident Fund, Investor Education

and Protection fund, Employees’ State Insurance, Income tax,

Sales tax, Wealth tax, Service tax, Customs duty, Excise duty,

Cess and any other statutory dues) showing the following

details :

a)Name
of the statute

b)Nature
of the dues

c)Amount

d)Date
of deduction

e)Due
date

f)Date
of deposit

g)Amount
of deposit

h)Month
wise deductions and contributions to Provident Fund and ESIC

9.1.2 Verify the details obtained in step (a) above with the relevant

records. Extent of check:

9.1.3 In the case of delays, are they significant? Ensure where the

company has not been regular in depositing the dues that the

extent of the arrears of such dues, if any, have been indicated

in the report by the auditor. Further ensure that the period to

which the arrears relate and, wherever possible, the fact of

subsequent clearance or otherwise have been indicated in the

report by the auditor.

9.1.4 Have the arrears been cleared? If not, have the amounts of

arrears been disclosed in the report?

9.1.5 Has the company been regular in deduction and/or deposit of

statutory dues in all cases? Ensure that management represen

-tation is obtained specifying amounts that are considered

disputed, containing a list of cases and the amounts in respect

of statutory dues which are undisputed and outstanding for >

6 months from the date they become payable.

9.2 Undisputed statutory dues

9.2.1 Obtain list of taxes/duties outstanding as at year end in respect

b)Are
the accumulated losses of the company at the year end equal to or more than
50% of its net worth and

c)Has
the company suffered cash losses in the concerned financial year and in
the immediately preceding financial year?

10.2Where
the company is a sick industrial company, is a detailed

note justifying
the preparation of accounting on a going concern basis placed on file?

11. Dues to financial institutions

11.1Obtain
a list of dues payable during the year to

a)Financial
Institutions

b)Bank

c)Debenture
holders

11.2Whether
theses dues have been paid in time? List all defaults in any payments showing
the period of default and amounts.

12. Secured Loans and advances granted

12.1Whether
the company has granted any loans or advances on

the basis
of security by way of pledge of share and securities?

12.2Whether
adequate documents and records are maintained for each such loan?

12.3Whether
the shares and securities held in Company’s name or are in possession of
company-obtain confirmation letters from the parties who have pledged the
security?

12.4If
proper documents or records are not available obtain explanation from the
company – List of the Deficiencies.

13. Chit Fund, Nidhi or Mutual Benefit Company

13.1 Whether the net-owned funds to deposit liability ratio is more

than 1:20 as on the date of the balance sheet?

13.2Whether
the company has complied with the prudential norms

on income recognition and provisioning against sub-standard

/default/loss assets?

13.3Whether
the company has adequate procedures for appraisal of credit proposals/requests,
assessment of credit needs and repayment capacity of borrowers?

13.4Whether
the repayment schedule of various loans granted by the nidhi is based on
the repayment capacity of the borrower and would be conducive to recovery
of the loan amount?

14. Investment Company

14.1Is
the company dealing or trading in shares, securities,

debentures and other investments?

14.2Have
proper records been maintained of transactions and contracts? Identify the
records maintained by the company for recording the dealings/trading, transactions
in shares, securities, debentures and other investments such as contracts
etc, and ensure its adequacy?

14.3Have
timely entries been made in such records?

14.4Have
shares, securities, debentures and other investments been held in the name
of the company?

14.5If
not, has company been exempted u/s 49 of the Companies Act?

14.6Also
refer to the RBI directions as Auditor’s report on NBFCs issued on 2nd
January 1998.